Saudi Arabia is willing to support oil prices

18 February 2016

Unprecedented cooperation between Opec and non-Opec nations realigns market dynamics

On 16 February the de facto head of Opec, Saudi Arabia, and the world’s biggest non-Opec crude producer, Russia, announced a preliminary agreement to freeze oil production at January levels.

The deal is unprecedented, marking the first time in decades that the two countries have officially worked together to coordinate future production.

As part of the deal, other Opec members, Venezuela and Qatar, said they were willing to limit their production.

The announcement was met with apathy by the markets. Brent crude fell by 3.6 per cent in the wake of the deal after seeing a 6.5 per cent increase earlier in the day.

The reaction is understandable. During January all of the country’s involved in the deal were producing near-record volumes of crude and global stockpiles remain high.

On the supply side the US shale boom and increasing supply from Iran will continue to weigh on global prices.

At the same time global demand is weakening as growth slows in China, industrial nations become more energy efficient, and renewable energy sources become more competitive.

Though a dramatic increase in oil prices seems unlikely over 2016, the talks between Saudi Arabia and Russia could well impact oil prices over the long term, improving investor sentiment.

Speaking in Doha after talks Saudi Oil Minister Ali Al-Naimi made it clear that the initial oil-production freeze is a foundation for further interventions, describing the deal as the “beginning of a process” and saying other steps are required to “stabilise and improve the market.”

“We don’t want significant gyrations in prices. We don’t want a reduction in supply. We want to meet demand. We want a stable oil price,” he said.

The deal marks a significant change of heart for Saudi Arabia – which previously said it wanted to see the oil market stabilise without imposing oil quotas on producer nations.

Whether or not the preliminary deal on the production freeze will be implemented remains to be seen, but the symbolic value of these public talks between two of the world’s oil superpowers should not be underestimated.

If Saudi Arabia and Russia continue to show a united front it is likely to improve market sentiment and help prevent further declines.

Wil Crisp

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications